Warner Music Group Corp (WMG) 2007 Q1 法說會逐字稿

Welcome to Warner Music Group's fiscal first quarter earnings call for a period ended December 31, 2006.

At the request of Warner Music Group, today's call is being recorded for replay purposes and if you object, you may disconnect at any time.

As a reminder, there will be a question-and-answer session following today's presentation. [OPERATOR INSTRUCTIONS]

Now I would like to introduce your call to Jill Krutick, Senior Vice President of Investor Relations and Corporate Development.

You may begin.

Thank you very much.

Good morning, everyone.

Welcome to Warner Music Group's fiscal first quarter conference call.

Hopefully you've seen the press release we issued this morning with our results.

We also filed our Form 10-Q today which you can find on our Web site at wmg.com.

Today our Chairman and CEO, Edgar Bronfman, Jr., will share with you our strategic update and our EVP and CFO, Michael Fleisher, will discuss fiscal first quarter results.

Finally, Edgar will wrap up before we take your questions.

Before Edgar's comments, let me remind you that this communication includes forward-looking statements that reflect the current views of Warner Music Group about future events and financial performance.

Words such as estimates, expects, plans, intends, believes, should and will and variations of such words or similar expressions that predict or indicate future events or trends or do not relate to historical matters identify forward-looking statements.

Such statements include but are not limited to estimates our future performance such as the success of future album sales, projected digital sales increases and gains in physical sales, expected expansion of the online marketplace and market share gains.

All forward-looking statements are made as of today and we disclaim any duty to update such statements.

Our expectations, beliefs, and projections are expressed in good faith and we believe there is a reasonable basis for them, however, there can be no assurance that management's expectations, beliefs and projections will result or be achieved.

Investors should not rely on forward-looking statements because they are subject to a variety of risks, uncertainties, and other factors that can cause actual results that differ materially from our expectations.

Information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in our earnings press release and Form 10-Q and other SEC filings.

We plan to present certain non-GAAP results during this conference call.

We have provided schedules reconciling these results to our GAAP results in our earnings press release posted on our Web site at wmg.com.

With that, let me turn it over to Edgar.

Thank you.

Thanks, Jill.

Welcome, everyone.

Thank you all for joining us.

As we anticipated on our last earnings call, this was a difficult quarter.

In some part because the industry still faces the challenging environment but almost entirely due to the comparisons to our very strong first quarter last year.

Today we'd like to give you some context around this quarter's results and since we manage our business for the full fiscal year and not quarter by quarter, tell you what we're doing to build upon the successes we achieved last year to continue to deliver on our strategic goals and to provide value to our shareholders.

Let me highlight some of our recent milestones for you.

First, we outperformed the industry by gaining market share.

According to Sound Scan, we're the only major recorded music company to increase our total U.S. album share year-over-year for calendar '06.

Our U.S. album share rose to 18% for 2006, up one percentage point year-over-year and giving us our highest calendar U.S. album share in four years.

Second, we had $100 million or more in digital revenue for each of the last two quarters.

On a percentage of total revenue basis we remain the leader in digital revenue among the majors.

This quarter our digital revenue was 11% of our total revenue, digital revenue and our domestic recorded music digital revenue was 17% of our total domestic recorded music revenue.

Third, we made great strides in our digital evolution, announcing several agreements to enhance our mobile partnering efforts, video strategy and international digital distribution footprint.

Fourth, despite an unusually light quarterly release schedule, we had some notable A&R achievements that strengthened our competitive position.

This is a result of our ongoing A&R strategy to focus on innovative efforts with established artists as well as initiatives to develop new artists, to gain share in the fastest growing genres, as evidenced by our acquisition of Roadrunner Records, a leading independent hard rock and heavy metal label, and to develop local repertoire in the largest international markets such as Japan.

As I mentioned, we face very tough comparisons against last year's outstanding first quarter.

In fact, our top five sellers in the first quarter of 2006 generated unit volumes that we haven't seen in that period in five years.

Accordingly, our first quarter revenue was 14% lower year-over-year on a constant currency basis.

Our strategy when we bought Warner Music in 2004 was to lead the industry transformation from a physical to a digital world.

As with any major transformation, we've anticipated fluctuations between periods of strong performance and periods of more challenging times.

Experiencing a tough quarter in no way alters our strategy, the way we manage our release schedule or our confidence in the future of the music business.

We continue to be extraordinarily excited about our future.

Now I'd like to cover some important developments regarding our digital business and our A&R strategy.

We're sustaining our leadership position in the music industry's digital revolution.

Warner Music Group remains the only major music company that reported digital album share in the U.S. above its physical album share for the December quarter and the 2006 calendar year.

Furthermore in calendar 2006, we saw our year-over-year growth rate of U.S. digital tracks exceed the industry's growth rate by 13 percentage points and our digital album growth rate exceed the industry's growth rate by 15 percentage points.

We had three of the top five best selling digital tracks in the U.S. for the calendar year including the top two, Daniel Powter's "Bad Day" and Gnarls Barkley's, "Crazy", as well as number four, Seann Paul's "Temperature".

In fact, Daniel Powter's "Bad Day" was the first digital single to be certified double platinum in the U.S. having sold two million copies.

We also remain on the leading edge of digital innovation thanks to our strong ongoing partnership with YouTube.

We were sponsored as part of YouTube's first every New Year's eve countdown presented by Chevrolet.

We provided special video content from New Year's celebrations with our artists as well as music videos and concert footage.

Generating nearly three million page views, this countdown was one of the more successful on line events to date in the streaming video arena and it underscores how quickly and easily we can reach an audience of critical mass.

This showcases how we are thinking about the business differently using advertising and other innovative means to monetize our content.

Beyond this, we entered into four agreements that highlight our mobile, video, and other digital licensing efforts.

First, we reached a strategic global partnership with Motorola to create new music-based products and experiences for the mobile platform.

This marks a first time a music company and a handset manufacturer have established a broad ranging worldwide agreement to collaborate on the development of digital products, marketing campaign, and strategic planning across multiple devices and featuring a variety of artists.

Our Motorola alliance is representative of the next phase in our mobile strategy as we focus on collaborating with manufacturers to complement and further enhance our carrier distribution footprint by creating the first rate music experiences on the handset to improved music-driven user interfaces.

One of the first mobile products expected to be offered as part of this agreement is the Moto Experience Pack.

Essentially a mobile bundle similar in concept to the WAMO Pack we debuted last year in Japan to the mobile carrier KDDI.

The Moto Experience Pack is a single file download to a mobile device that contains several music-based products creating a feature rich multimedia artist experience on the handset.

Moto Experience Packs will be available in the second half of 2007.

Second, we established a strategic relationship with MOBiTV, the global leader in mobile and broadband television and music services to create exclusive Warner Music artist branded TV channels across MOBiTV's mobile and broadband platforms.

This agreement is another opportunity for Warner to transform our huge repository of video content from a secondary marketing expense into a primary profit center to an advertising and pay-per-play revenue model.

Third, we were the first media company to reach a broad content and licensing agreement based on an ad supported model with Last.fm, a social music networking site.

According to Last.fm, the Company has more than 15 million listeners per month.

Based on user music user preferences, Last.fm fashions personalized radio streams and connections to users with similar tastes.

Finally, we strengthened our international digital distribution efforts with the acquisition of the majority stake in Zebralution, a German-based digital distribution company which provides content to a large network of mainstream digital services and niche download portals.

This agreement will bolster our international distribution network in an effort to expand our digital leadership position across continental Europe.

Moving to our global releases and A&R initiatives, Warner had some notable achievements.

Before I detail those for you, I'm going to take a moment to describe how we measure our own health and the health of the industry because I think it may be a little unique, probably not revolutionary, but maybe different from what others do and it stems from the way we view ourselves, not as a traditional record and songs business, but a broadly based music-based content company.

Traditionally, success would be measured by examining sales of album units.

That's an important, but increasingly irrelevant measurement as it's only part of the picture.

Let me note here that total industry-wide album units sold in the U.S., both physical and digital, fell 4% in the December quarter as compared to the same period last year according to Sound Scan.

We lagged the industry this quarter for year-over-year percentage change in U.S. album unit sales due to a light release schedule, but outpaced the market for the quarter and the year in U.S. catalog album unit sales rising 4% year-over-year in the December quarter.

But just looking at album sales misses a substantial part of the picture and when we analyze the market we add to digital and physical album sales the album equivalent of digital tracks.

Converting the digital track sales to album sales using the RIAA standard 10 tracks per album, the U.S. music industry is down 2% year-over-year for the quarter and just 1% for the calendar year 2006.

If we convert our Warner Music digital track sales to album sales, we outpace the industry, which was down 1% while we were up 3%.

But even converting digital track sales to album sales provides an incomplete assessment of the market because it ignores the mobile music business and online subscription services.

Hopefully the market research industry will soon adopt metrics which permit music companies to compare themselves to each other and to the industry, taking into account every popular format and distribution channel for music, not just physical and digital albums.

In this vein, let me discuss a couple of issues that have been in the news recently, interoperability and digital rights management, or DRM.

Let me be clear.

We advocate the continued use of DRM in the protection of our and of our artists' intellectual property.

The notion that music does not deserve the same protections as software, television, films, video games, or other intellectual property simply because there is an unprotected legacy product available in the physical world, is completely without logic or merit.

But let's not lose sight of the core issue.

By far the larger issue for consumers in the music industry is interoperability.

As a content company, we, of course, want consumers to seamlessly access our music and to use the music they have purchased on any platform and with any service, physical or digital.

The issue is obscured by asserting that DRM and interoperability is the same thing.

They are not.

To suggest that they cannot coexist is simply incorrect.

At Warner Music, we continue to seek a balance between appropriate protections for our intellectual property and a robust and satisfying music experience for consumers.

Interoperability surely would enhance that balance while eliminating DRM would do just the opposite.

We will not abandon DRM nor will we disadvantage services that are successfully implementing DRM for both content and consumers.

Now moving beyond digital to our successful A&R investments.

For the 2006 calendar year, we gained album unit share in the U.S. year-over-year in four of the top five musical genres including top sellers, R&B, alternative and hard music based on releases from artists such as James Blunt, Red Hot Chili Peppers, Josh Groban, Gnarls Barkley and My Chemical Romance.

Furthering our strategy to enhance our A&R presence in growing genres, on January 29th, we completed the acquisition of 73.5% of Roadrunner Music Group, which includes Roadrunner Records, one of the world's leading hard rock and heavy metal labels.

Roadrunner will operate as a freestanding label group within our Atlantic Records group.

The label's multi-platinum Grammy nominated artist, Nickelback, whose songs are also published by our own Warner/Chappell, is responsible for the number one hard music album for 2005 and 2006 in the U.S., and in four of the last five years, Roadrunner has at least one of the top five selling hard music acts in the United States.

Despite the small number of releases in this quarter as compared to the much larger output in the prior year quarter, during calendar year 2006, we maintained our momentum in breaking new artists.

Atlantic's successful turnaround efforts to build a sustainable artist roster are best illustrated by its six new artists who sold more than 500,000 albums each in the U.S. during 2006.

Based on our research, no other record label has achieved this level of success in the United States in breaking new artists in any of the past five years.

Underscoring the creativity of our artists, when the Recording Academy announced nominations for the 49th Annual Grammy Awards, I'm delighted that Warner Music Group, artists and distributed recordings earned an outstanding 105 nominations, up from 67 nominations last year with an additional 41 nominations going to Warner/Chappell songwriters.

Our artists were nominated in virtually every major category and genre.

Also notable is the fact that our own Warner Brothers Records label garnered more Brit Award nominations than any other label in the industry.

We have been successful with our A&R efforts designed to enhance our local repertoire in key international markets and drive international superstars globally.

In Japan, the world's second largest recorded music market, our operating momentum continued into the fiscal first quarter led by both by local artists including Kobukuro and Ayaka and international artists such as Daniel Powter, James Blunt and Madonna.

As a result, our album share in Japan doubled on a year-over-year basis in both the December quarter to 12% and calendar year 2006 to 8%.

Our local and international repertoire success has expanded beyond Japan to Italy, Spain, France and Germany where we have seen improved momentum in top sellers.

Turning to music publishing, in December we announced a leadership transition at Warner/Chappell in an effort to further accelerate the Company's performance.

We named Dave Johnson, our EVP and General Counsel as Warner/Chappell's acting CEO as we undergo a leadership search for Warner/Chappell.

Dave comes to this role with considerable experience and a broad range of recorded music and music publishing matters.

And I'm pleased that Richard Blackstone will stay on in a consultant role and I'm confident that Dave will build upon the progress to date at Warner/Chappell.

In addition, Paul Robinson, our Senior Vice President Deputy General Counsel, is now our acting General Counsel.

We continue to remind the market that we manage our business for the fiscal year, not any particular quarter.

Our light release schedule compared poorly to our exceptionally strong schedule from last year.

As we noted during our last earnings call, we continue to expect 2007 to be a back-end weighted year based on the timing of our releases.

We also continue to make progress in achieving our internal growth targets.

In short, we entered 2007 with the vitality and drive to innovate as we continue to develop and broaden our business and our revenue stream in keeping with our focus to transition from a company selling records and songs to a music-based content company.

Before turning over the call to Michael, I would like to take a moment to pay tribute to Ahmet Ertegun who recently passed away at the age of 83.

Ahmet was not only the founding Chairman and chief architect of Atlantic Records, but he also played a pivotal role in the creation of the Warner Music Group.

He served as an advisor as the entire company grew both domestically and globally and his influence helped shape the artistic process at Warner Music.

For nearly 60 years he signed, recorded, and developed artists whose creative work would come to define entire genres and shape popular culture, from R&B to jazz, to rock and roll to pop and would inspire generations to come.

A few of the many artists that Ahmet personally nurtured include Ray Charles, Bobby Darin, Aretha Franklin, Eric Clapton, Led Zeppelin, the Rolling Stones and Phil Collins.

For those of us who had the opportunity to work with Ahmet in recent years, we feel truly blessed.

He was a vital presence at the company until the very end and he will be missed.

Now I'd like to turn the call over to Michael for a run through of our financials.

Thank you, Edgar, and good morning, everyone.

Let me begin by covering some of our key financial highlights.

For the quarter, we generated net income of $18 million, or $0.12 per diluted share.

Looking at the income statement for the three months ended December 31, 2006, we reported revenue of $928 million, which declined 11% from the same period last year, or 14% on a constant currency basis.

As expected, a tough comparison to the success of our prior year quarter and a challenging industry environment were clearly evident in our results.

Domestic revenue fell 12% while international revenue declined 16% on a constant currency basis.

Declines in our physical recorded music business, and to a much lesser extent our music publishing business, contributed to the revenue declines on a constant currency basis, partially offset by year-over-year increases in our digital business.

In recorded music, quarterly revenue declines in the U.S. and Europe were partially offset by increases in the Asia-Pacific region, particularly Japan.

As Edgar mentioned, Japan was a standout again this quarter with revenue rising more than 70% year-over-year as strength in both local and international repertoire propelled sales and album share.

Music publishing quarterly revenue declines in the U.S. and Asia Pacific region were partially offset by growth in Europe and Latin America.

Our quarterly digital revenue rose 45% to $100 million, or 11% of total revenue from $69 million, or 7% of total revenue in the prior year quarter.

Quarterly digital revenue slipped $4 million from $104 million sequentially, driven mainly by the lack of top selling major artist releases in the quarter.

Approximately 65% of our digital revenue is generated in the U.S. and 35% in the rest of the world.

This compares to the approximate 70/30 split we averaged over the previous three quarters.

Perhaps an early sign that we may have begun to make headway in our efforts to improve the momentum in our international digital business.

International digital recorded music revenue as a share of total international recorded music revenue more than doubled in the quarter year-over-year from 3.5% to 7.3%.

Our worldwide digital revenue continues to be split about 50/50 between online and mobile.

While today online is still larger than mobile in the U.S. and the reverse is true internationally, we see this distinction continuing to blur as the mobile contribution becomes more prominent in the U.S.

We continue to believe that we are still in the very early stages of a digital music revolution that will flourish as 3G penetration rises, product innovation flows and broadband expands globally.

Operating income before depreciation and amortization, or OIBDA, declined to $140 million compared to $202 million in the prior year quarter.

We experienced a decline in our margins this quarter which is the result of lower revenue and substantially similar fixed costs.

Last year's first quarter's releases outperformed our expectations from both a revenue and OIBDA perspective.

They generated substantially higher than expected sales volumes in the quarter and, therefore, related costs such as marketing expenses did not grow in parallel to the sales achieved.

As a result, last year's first quarter had unusually attractive profit characteristics.

With the lack of such blockbuster releases in the current quarter, our OIBDA margin was 15.1%.

Let's now look at the different business segments.

Quarterly worldwide recorded music revenue fell 16% to $800 million on a constant currency basis.

Contributing to this decline was a tough comparison against strong releases in last year's quarter, which included Madonna and Enya, as well as significant carryover sales from James Blunt and two pieces of Green Day product.

Our top five sellers in the first quarter of 2006 accounted for nearly 16 million units worldwide, a sales magnitude we haven't seen in that quarter in five years.

In fact, three of the top five sellers of all of 2006 had peak unit sales in the first quarter of that year.

Furthermore, the benefit of our successful first quarter of 2006 releases reverberated in the second quarter as well when James Blunt's album reached its peak worldwide success.

As a result of this and other significant second quarter 2006 successes, we believe our comparisons remain tough in our second quarter of 2007, as well.

Furthermore, as we previously stated, we expect fiscal 2007 to be back-end weighted based on the timing of our release schedule.

Domestic recorded music revenue fell 11% in the quarter and international recorded music revenue declined 19% on a constant currency basis from the prior year as the large releases and successful carryover albums in the prior year had significant international sales.

Recorded music digital revenue grew 45% from the prior year quarter to $93 million, or 12% of total recorded music revenue.

Domestic recorded music digital revenue amounted to $61 million, or 17% of total domestic recorded music revenue, up from 11% last year.

Major sellers for the quarter included Josh Groban, My Chemical Romance, Eric Clapton, Diddy and Luis Miguel.

Quarterly recorded music OIBDA was $141 million, a 32% decline year-over-year, which reflected the tough comparisons, lower revenues on a similar fixed cost base and a difficult industry backdrop.

Let's move on to our music publishing business.

In comparison to the same quarterly period in 2006, music publishing revenue grew 1.5% to $133 million, but fell 3% on a constant currency basis.

Improved international performance was offset by weak domestic results.

All international revenue sources, mechanical, performance, synchronization and digital were flat to up year-over-year highlighting the initial benefits of our turnaround initiatives.

Our domestic revenue components were down modestly, except for improved digital results.

Music publishing OIBDA decreased 10% over the prior year quarter to $19 million as we continue to invest to drive our long-term growth plan.

As for our cash management and our balance sheet, we ended the quarter with a cash and short-term investments balance of $337 million, which consisted of $327 million in cash and $10 million in short-term investments.

Total net debt amounted to approximately $1.9 billion.

We declared our quarterly dividend of $0.13 per share on December 29th, giving us a yield of 2% based on yesterday's close.

The dividend will be paid on February 16th.

We maintain our intention to pay up to an $80 million annual dividend to shareholders on a quarterly basis.

For the quarter we generated free cash flow of $16 million.

Our free cash flow is calculated by taking cash from operations of $37 million, less Cap Ex of $5 million, and net cash paid for investments of $16 million.

Our unlevered after-tax cash flow, we believe, provides the most accurate reflection of the ongoing cash generation capability of our business.

Unlevered after-tax cash flow, calculated by adding back $49 million in cash interest to free cash flow, was $65 million in the quarter.

Our cash conversion, calculated by taking unlevered after-tax cash flow and dividing by OIBDA of $140 million, was 46% as compared to a conversion rate of 30% for last year's quarter.

On the tax front, our net cash taxes were $15 million for the quarter.

Substantially all of our income taxes are being paid outside the U.S. because our U.S. taxable income is being offset by our interest expense deduction and the annual recurring non-cash amortization reduction.

For the three months ended December 31, 2006, we had a tax provision of $15 million on pretax earnings of $33 million, giving us an effective tax rate of 45.5%.

This rate is above the prior year quarterly rate of 30% because of a greater income contribution from countries with higher tax rates outside the U.S. and because we continue to shield substantially all of our U.S. income.

We do not manage our business for any single quarter.

We strive to release the right content at the right time in an effort to maximize fiscal year profit and artist career development.

As a matter of policy, we do not provide financial guidance to the investment community given the quarterly variations and the timing of our music release schedule and associated marketing and promotional expenses are normal.

We are confident in our ability to execute on our transformation agenda for the remainder of this fiscal year and beyond and we remain pleased with our financial strength, digital leadership and cost management efforts.

Now I'd like to turn the call back to Edgar for closing remarks.

Thanks, Michael.

Over the course of this upcoming year we have an agenda that builds upon the successes of last year.

We plan to sustain a digital leadership position and enable and promote new business models.

We will increase our margin and market share through our multi-pronged A&R strategy and we'll drive profitable growth through innovation and cash flow generation through financial discipline.

Our goal is to continue to drive shareholder value over the fiscal year and beyond as our transformation continues.

We look forward to answering your questions about our business.

Thank you.

Operator, could you please open it up for Q&A?

[OPERATOR INSTRUCTIONS] Our first question comes from Doug Mitchelson and your line is open.

Please state your company name.

Deutsche Bank.

Thank you very much.

Hello, gentlemen.

One thing that struck me as Mr. Jobs announced his willingness to drop music DRM is that negotiating leverage has begun to shift, I felt initially Apple had the upper hand in negotiations of music labels given the impact on your business from piracy and the promise of digital growth you could provide.

But now the sales of iPODs and the revenue from iTunes and Zune and iPhone are beginning to dominate results and sentiment for Apple and perhaps now music has become as important or more important to his stock price than it is for yours.

Do you have any thoughts on that?

I don't think it's helpful to sort of talk about who's got more leverage in a negotiation.

What I feel is that the more that the music industry and Apple can work together, it seems sensible to do so for both industries.

So I think more dialogue between the industry and Apple could only be a positive thing.

And frankly, manifestos in advance of those discussions I think are counterproductive.

All right.

Well could I follow-up then with any comments on where negotiations with satellite radio stand?

And I just wanted to confirm that any increase in license fee rates retroactive to the beginning of this calendar year.

Thanks.

Doug, by statute, any increase in rates would be retroactive to the beginning of this year.

At the moment satellite radio negotiations are proceeding as per the arbitration proceedings that are embedded in the original agreement, which means to say what they're willing to pay and what we're willing to license for are widely apart.

And we will be in arbitration to determine what the appropriate rate is.

There's no way to suggest that we know what the outcome will be.

I'm reasonably confident that the outcome we will do better than we are currently doing, how much better, we will have to see.

But whatever that increase is, it will be retroactive to January 1.

And then just, you know, timing of arbitration.

I know you probably can't predict exact dates, but is it something that takes one month, three months, six months?

I would say it's probably, you know, it's a lengthy process and I think we should probably be hearing something towards, it should be done, I would think probably by the end of the year.

It could slip into early next year, but I think hopefully it'll get done this year.

Great.

Thank you very much.

Thanks, Doug.

Our next question comes from Eric Handler and please state your company name.

Thank you.

Lehman Brothers.

I wonder is it possible that you can give us a sense of what the average price per SKU has increased over the last year for some of your mobile product since there's not a lot of pricing leverage on the digital download side?

And then secondly, can you maybe give a sense of your ADA business has done quite well this year and you've acquired Ryco.

Your independent side of your business, just how big is that in terms of total revenue or a percentage of total revenue?

I don't think we break out individual pieces, but I'll let Michael answer the second part of that question if it's a different answer than the one I just gave.

To the first, I want to point two things out.

One, to sort of answer your question directly, I believe our pricing on the mobile platform has remained relatively flat.

There's been no diminution in pricing to the mobile platforms this year.

But the further point I want to make is when you're talking about the digital pricing, whether it is online or in mobile, it is a different dynamic than when you look at pricing in the physical model.

And that is to say that there is much more profit opportunity given our model in the digital world for dramatic volume growth than anything else.

So I don't think we should be quite so fixated on the margin per SKU in the digital world because whether we are reproducing one file or one billion files, our costs remain effectively the same.

So we're obviously focused on maintaining margin, but we're also focused on finding consumer propositions that will drive dramatic uptake and significant volume.

Michael do you want to talk about--

Eric, we don't break out separately ADA, which is our alternative distribution alliance independent group.

But if you look at Sound Scan numbers, which are public, you'd find that that's about, for 2006, that was about 2.5 points of market share, just to give you a scale.

Okay.

Thank you.

Thank you.

Our next question comes from Anthony Noto.

Please state your company name.

Hi, this is actually Ingrid Chung for Anthony, it's Goldman Sachs.

So our question this morning is we recognize that you had tough comps in the quarter but we were a little surprised that digital revenue was down sequentially and to us that implies that catalog digital growth has probably matured.

We were wondering if you were surprised by this decline and think March quarter could be up?

Well, Ingrid, we don't give any guidance so I'm not going to give any visibility into the March quarter.

But we were weren't surprised at all.

And I think one of the things we've been saying for several quarters now is that as digital becomes a more meaningful percentage of our total revenue, it's going to fluctuate based on release schedules just like the physical business does.

And so actually I think, the way I look at it at $100 million of digital revenue in the first quarter compared to $69 million the year prior, when the year prior had huge digital sales of Madonna, Enya, Green Day, James Blunt, that's pretty phenomenal year-over-year growth considering the release schedule.

So yes, I understand there was a $4 million decline sequentially, but I think if you look over the year-over-year compares and what we were selling in the market, I think you'll see that there was continued phenomenal growth.

And I think the other piece is you look at it and you realize that it's still 11% of revenue.

So if that started to decline dramatically, I might be more concerned the way you are, but I'm not.

And it wasn't off from our expectations at all.

Okay.

Fair enough.

And then in terms of your back half of the year, you said your release schedule should be stronger.

Are we looking for additional promotional spend in the second quarter then?

It's Edgar.

I don't, again, we don't really give guidance so I don't want to sort of bring you to a conclusion.

We definitely have a back-end weighted year.

We sometimes have expenses in the prior quarter before the release of something in early part of the next quarter.

But I don't think that you should anticipate that the second quarter would be unusual in that regard.

Okay.

Great.

Thank you.

Our next question comes from Bishop Sheen and please state your company name.

The company is Wachovia.

Good morning.

Thanks for taking the question.

The light release schedule as you have pointed out drives a lot of things.

Can you just give us some scale on the release schedule?

Can you quantify it for us at all?

Q1 versus Q1 last year or give us an idea percentage wise how much bigger the release schedule might be in the second half versus the first half?

Yes, Bishop, it's hard for me to do the going forward stuff for the first half because, as you know, we just don't disclose that information.

I think most relevant comparison, right, if you look at the top five last year in the first quarter, the top five selling piece of product at 16 million units.

The top five this quarter did 7.5 million.

So you really get a sense of it was an extraordinary volume movers last year.

I think the other thing I sort of re-emphasize is that obviously everybody understands how that moves revenue, but I think it's important to highlight what I talked about a minute ago on the call, which is that the notion that last year because some of those big movers had much better than expected volumes, the profit was unusual last year.

And so I think it affects the comparison on both the revenue and the OIBDA line.

Okay.

And one follow-up.

In terms of digital distribution domestically, do you expect to see a lot more distribution opportunities for you on the Web via various new downloading sites or do you think there's a lot more upside for you in the mobile platform?

I would, this is Edgar, I would say both, Bishop.

I think, first of all, you're starting to see the beginnings, the earliest beginnings of the maturation of sites like YouTube, MySpace, others that really from a commerce enabled standpoint are only just beginning to get started.

I mean first of all, they're just beginning to get started as companies, somewhere between one-and-a-half years old and three years old but none of them really adept yet at creating real commerce.

That, of course, is coming.

So sites like Facebook, many others, you're going to see, I think, significant businesses built on the Web around social networking and those things that drive social networking, music chief among them.

So there's a tremendous monetization opportunity ahead of us as those businesses build and mature.

I think equally on the mobile side, and I say this quite frankly.

I think the coming of the iPhone is a very, very positive development for consumers, for the music industry, and frankly for the carriers and other manufacturers.

We've always said that we think one of the things that has held back the mobile industry from being a much greater factor in content distribution than it has been so far has been sort of the lack of really outstanding user interfaces.

I think what Apple has demonstrated we'll see if it works, but given Apple's history, I'm sure that it will.

They've created a phone that not only looks good, but suggests that you can operate it in a way that makes your content, the acquisition and playing of your content simple, easy, and fun.

And now the entire industry essentially has a paradigm, they've got a bar to shoot at.

And I think that you'll see from Nokia and Motorola and LG and Samsung and Sony, Ericsson and the other manufacturers and the carriers, a significant increase in effort and focus to match or exceed the bar that's now been set by the iPhone introduction.

That can only be positive for the music industry.

And I expect that 2008 will be sort of the defining years for when mobile becomes a significant part of the music distribution picture.

Thank you, Edgar, appreciate it.

Thank you.

Our next question comes from Michael Savner.

Please state your company name.

Good morning.

Banc of America Securities.

Edgar, as you kind of approach your renegotiations with iTunes for carriage, could you just maybe talk conceptually about what's changed over the last couple of years in terms of what's more important to you today as you look to kind of renew your distribution and maybe what's less important today?

And then, Michael, two quick, just kind of quick model question, one, and I apologize if I missed it, what was the bump in international publishing revenue during the quarter?

And then secondly, I think a year or so ago we talked about advances to artists on an annual basis probably kind of being in that 50 to $60 million range and would probably grow modestly from there.

Can you just talk about if that's conceptually still the right way to think about that line?

Thanks very much.

Michael, it's Edgar.

I really think, as I said earlier in the call, conversations between the industry or and/or individual companies and Apple really are best conducted privately and I think I don't want to preview our negotiations in public.

I prefer to have those discussions privately with Apple and that's what the approach we intend to take.

Michael, on the international publishing, there's nothing unusual.

As you'll remember the way revenue is accounted for in our publishing business is on a cash basis and so, and we are somewhat at the mercy of the collection societies internationally and it literally is sort of when they send us a check, we book the revenue.

And so there are sort of flows up and flows down from a quarter-to-quarter perspective that are not ones that we sort of actively manage we just deal with them as they arrive.

So nothing unusual there, it's just when the collection society send us the money.

On advances to artists, nothing has changed.

I think our strategy is still the same, which is a tighter roster of artists with whom we invest more behind and, therefore, you'll continue to see us put our money against advances for our key artists both new and established.

Thanks very much.

Our next question comes from Jolanta Masojada and please state your company name.

Credit Suisse.

Michael, I wondered if you could give us a bit more clarity on cost issues going forward in the current financial year?

Your music publishing costs were up in the quarter and corporate was down and recorded music was down so can you talk about what your expectations are for music publishing for the full-year?

And on the recorded music side, are there any particular initiatives underway to help reduce the fixed cost base given this ongoing decline in physical sales?

Hi.

Jolanta.

I think first of all, I'll restate.

I'm not going to give guidance for the year on costs anymore than I am on revenue.

But here's how things are playing out.

On the music publishing business, as we said before, we continue to invest more there partly in infrastructure and people to generate revenue off of our incredible catalog, and also in part in new artist signings, both of which run through the cost in the P&L line.

So that's what you're continuing to see in that business and I think you'll continue to see that on a year-over-year comparison basis as we continue to make investments there to drive long-term revenue growth.

On the recorded music side, I think what you're generally seeing is, again, the costs fluctuate to some extent with the revenue.

We have a dramatically variable cost structure generally.

And so if we have a lighter release schedule as we did this past quarter, we're going to spend less money on marketing and promotion and all the other expenses.

Across the board and across our company, we remain pretty vigilant about managing our costs.

This is something we've been doing since 2004 when we dramatically reduced the cost structure here.

We haven't let off that and so I think you will continue to see us over the course of this year and into the future manage our costs aggressively.

If we think there are places where we can be more efficient, there are places where can take costs out, if there are places where our costs aren't aligned correctly with the market, you'll continue to see us manage that process.

One piece in particular is we continue to be aggressive in trying to find costs that are directly tied to the physical side of our business and get those costs out or turn into a variable nature so that we can move those costs over to investments in the digital side.

And I think you'll continue to see us do that over the next few quarters.

Thanks.

Our next question comes from Mark Sugarman and please state your company name.

Yes, it's Citigroup.

I've got three questions, actually.

The first is 2007, the early data from Sound Scan is pretty eye catching, weak.

Can you give us a sense of whether you think that's release schedule driven or is there some other reason why the market's taken such a big dive in the first month?

Maybe you could provide us with a sense of what the sort of top 20 albums year-over-year look like versus the top 200 or something like that.

Second question is, you provided some interesting analysis on the U.S. in Q4 when you broke down physical and digital albums and then singles, mobile, and subscription.

Do you have similar data internationally as well to give us a sense of how physical and the total market has been doing outside of the U.S.?

And then the third question is just on pricing.

You talked about mobile pricing, but how is -- how are the trends in physical pricing?

Thanks.

So Mark, let me at least do the last one and then maybe Michael, you want to, we can talk about the first two.

On pricing, we've seen essentially no diminution in pricing across the board whether that's on the mobile platforms, on the digital online platforms, or on physical platforms.

Our wholesale margins remain essentially constant year-over-year quarter-over-quarter.

Mark to answer your other questions, I think on the physical versus digital detail, we're endeavoring to give everybody more and more information.

We'll continue to do that.

I don't have anything more to report specifically on international today.

But point noted and we'll continue to work to give more detail so that people can understand what's going on there better.

On the what's happened in the first five or six weeks of the year, we think it's very much release schedule driven and I'm hopeful that people aren't going to look at five or six weeks and try and project the year because that certainly would be bad in previous periods.

In particular, if you look at 2006, in January last year the industry had several major releases in January, Mary J. Blige, Jamie Foxx, Eminem, and Notorious BIG.

So there were real releases last year driving post holiday volumes and there haven't been any major releases almost across the industry in a substantive way.

Until this week.

Until this week.

Right.

I think it is, I would agree with Michael, it is very much release-driven.

We don't expect January to be a harbinger of the year.

Can I ask one other follow-up?

I know there was a question before where you talked about looking particularly at physical costs.

There was an article in one of the papers over here in Europe earlier this week which talked about the movie industry relationship with retail and saying that the movie industry for the first time allowing retailers to burn DVDs in store and then sell them to customers.

Is that something that the music industry could do and would cut distribution costs at the very least?

We already do that.

We do that in many countries with many different suppliers in what we call kiosk agreements or other kinds of agreements with retailers where [our] consumers can go in to, it depends on the store and the nature of the retailer.

But let's say on a traditional music retailer where consumers can go into the store and really burn their own CD from a selection of different artists, different songs, et cetera.

And I think retailers are looking at that as potentially a way to increase their business and spending more money up against it.

It's not yet a large part of our retail business to be sure.

But we already have that technology in place and licenses, many, many licenses for that business.

Thank you very much.

Our next question comes from Ian Whittaker and please state your company name.

Yes, I'm from UBS.

Most of the questions have been answered, but just one quick one, actually.

Vivendi was saying earlier this week that basically they expect 2007 to be better in terms of recorded music simply because of the release schedule.

Now I think you mentioned earlier but over this calendar year you actually expect to gain market share.

So if Vivendi's actually gaining market share, you seem to be gaining market share.

I mean are you taking a share really from the other music majors or is it coming from the independents or what's your sort of gut feel as to how things will progress?

Well, it's particularly interesting for me, I guess to answer a comment about Universal Music Group's prospects having been there and being a great admirer of the people who basically all of whom were there when I was there.

I admired them then and I admire them now.

They're a very good music company and I think they will continue to do well.

I think, frankly, we're a pretty good music company, I think we'll continue to do well.

I think getting market share ultimately while it's an important measure of our growth within the industry, the more important factor is to make sure the industry grows.

So whether we pick up a half a point or a quarter a point or five points, frankly, of market share, it's going to be really less meaningful than it would be if we had the industry growing at a more rapid clip.

So our first focus really is to do everything we can as an industry to take the approaches, follow the policies and promote the initiatives that can allow the industry to grow.

And then I wouldn't say secondarily, but then focus on our own company mission which is to create our own growth and take market share as a result of our growth outpacing others.

That's really how we think about it.

And of course, we have embraced the independent community in a way that other companies have yet to do so that we hope our growth will include not only our major releases and our more traditional product, but also increase momentum with the independent sector, as well.

Just a quick follow-up question.

I think Mark mentioned the U.S.

Sound Scan data year-to-date, I know it obviously depends on the release schedule.

But are there any other sort of major international markets, major international markets that you're perhaps been quietly confident on in terms of recovery sales?

Which we're quietly confident?

I think, you know, it varies market to market.

And I think if you're asking in '07 year, I'd simply say I really wouldn't predict either optimism or pessimism based on sort of four or five weeks data.

And particularly international markets report more slowly.

So the amount of data we have in the U.S. is actually far greater than year-to-date data that we have in most of the European markets.

So even based on, say, three or four weeks of data from international markets, I just wouldn't, I don't want to be optimistic or pessimistic because I just don't think I've got enough data to be either one.

And I don't want that answer to indicate either one or the other.

It's just I don't have enough data to be hopeful to you in saying this market will or won't be performed well based on early returns.

Okay.

Thanks very much.

Okay.

I think with that I want to say thank you to everyone who has followed us in the past and continues to follow us.

We appreciate your time and attention and look forward to speaking to you again at the end of our second quarter.

Bye-bye.

And that does conclude today's conference.

You may disconnect at this time.